Nick Rowe has a very clear way of distinguishing different views on the debt burden. This is useful because the common discourse in this is full of vitriol with every point of view claiming the mantle of true science.* I’m apparently pretty similar to Rowe. I would provide weights of 50% to James Buchanan, 10% to Ricardian Equivalence, and 40% to Samuelson, whereas he would go 33% across the board. But I’d like to add something Austrian that I think gets lost and buttresses the Buchanan perspective. To the extent that Ricardian Equivalence is not true, government debt screws up individuals’ plans – that statement is almost true definitionally. If people had planned for it, they would have saved for it. Debt becomes a burden on future generations when they have not planned for it. Meanwhile, the people who invested in treasury bills of whatever did plan for that money to be there. It’s their retirement plan, or an essential cash flow on a bank’s balance sheet. So if people don’t save in response to new taxes, there is an illusion that there are more resources available in the future economy than there actually is. The mixture of durable goods, various investments (including and especially in housing, family businesses…), and whatnot corresponds to a certain expected income level that cannot be attained. So it is a burden. HT Daniel Kuehn.

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4 responses to “Browsing Catharsis – 01.03.12”

I’m guessing almost no one actually believes #1. People who get accused of believing #1 actually believe #4 and just think some of Lerner’s observations are important, so they can sound like #1.

Everyone acknowledges the points of #2 and #3.

Which is to say, I think, that almost everyone that has thought about this issue is also a mix of #2, #3, and #4, which is why I said this is mostly semantic. I have no idea why everyone is piling on Krugman so much, who seems to me to be clearly a #4, except that people just like to be mad at Krugman.

The important point is that the public in general seems most ignorant of #4, and now is precisely the time to make them not-ignorant of #4, yet when Krugman tries to do that he gets accused of having made really dumb mistakes.

rh: OK. Valid point about the “surprise” aspects of the future tax liability. An uncertain liability (because we don’t know which generation it will hit and when it will hit that generation) will be more costly, because it’s hard to plan for it. I haven’t seen that before.

Daniel: if you read the comments on my post, you will see some people saying they believe #1, or saying that other economists believe #1. I used to believe #1 myself! It’s not a “dumb” mistake (except in hindsight). Abba Lerner was not dumb.

I still believe PK believes #1. Though his most recent post did veer a bit towards #4.

I’m only a *little* bit mad at PK, right now. Because he accuses other people of making dumb mistakes, when they aren’t. And mostly because he won’t acknowledge my argument!

If it were just uncertainty, individuals would still be behaving “optimally.” You could probably construct some probability distribution with different weights on different generations, and not get something substantially different from the model assuming perfect foresight. What I think is really going on is that people are dumb, and by that I mean that they are unable (or unwilling) to rationally consider the practical effects of deficits.